Walker Presents Are Tax and Accounting Rules Discriminating Against Discounted Employee Stock Options Justified - 21 Jan 2009

January 21, 2009

Walker Presents Are Tax and Accounting Rules Discriminating Against Discounted Employee Stock Options Justified? Today at Toronto

http://taxprof.typepad.com/taxprof_blog/2009/01/walker-presents-.html

David I. Walker (Boston University) presents Are Tax and Accounting Rules Discriminating Against Discounted Employee Stock Options Justified? at the University of Toronto today as part of the James Hausman Tax Law and Policy Workshop Series.  Here is the abstract:

Contemporaneous grants of both stock and at-the-money options to
individual employees of U.S. public companies indicates demand for
equity compensation packages that are in the money, i.e., packages of
equity pay instruments that in aggregate have payoff profiles and
incentive properties that are similar to explicit in-the-money employee
stock options. However, several tax rules (and formerly accounting
rules) strongly discourage grants of explicit in-the-money options,
including recently enacted § 409A, which essentially precludes the use
of explicitly discounted options by taxing these instruments at
vesting, rather than at exercise, and adding a 20% penalty tax. This
article explores whether the tax and accounting distinction between
discounted and non-discounted options makes sense.

The stated legislative rationales for rules discriminating against
explicit in-the-money options are weak, reflecting a dichotomous view
of equity compensation divided between discounted and non-discounted
options, when, in fact, option design is a continuum. However, this
article sets forth a novel tax policy rationale for forcing firms to
bifurcate in-the-money pay packages into discrete grants of stock and
non-discounted options, a combination that I refer to as a synthetic
in-the-money option. In short, doing so precludes the unwarranted
expansion of preferential option tax treatment to instruments
resembling restricted stock.